EghtesadOnline: European diplomats are warning that enhanced US financial sanctions against Iran run the risk of forcing the rest of the world to create alternative banking systems that could undermine the long-time dominance of the US dollar.

The issue has come up as the Trump administration considers aggressive sanctions aimed at expelling Iran from the international banking system. As the deadline for sanctioning Iran’s oil industry approaches, the spotlight has shifted to the Society for Worldwide Interbank Financial Telecommunication, an entity led by representatives of major banks from the world’s 10 largest economies that helps banks around the world communicate with each other on transactions.

The United States doesn’t control the global group, but Trump could threaten to ban those board members from working in the US financial system if they help Iranian banks defy US sanctions.

But that possibility is also raising questions about how the world might react. One western diplomat said the move could be enough to accelerate talks about the need for alternative systems that don't rely on the US dollar and US policy, a move that could eventually end up hurting the US dollar, Financial Tribune reported.

“At the moment, sanctions are effective because of US financial dominance as the global reserve currency — forcing SWIFT out of Iran could incentivize China or Russia to establish their own SWIFT system, which is not in any of our interests,” the unnamed diplomat told the Washington Examiner.

“What is going on with SWIFT could also be applied to Russia or China,” a European diplomat said. “And then what is going to happen to the financial system as a whole?”

Despite those warnings, many Iran hawks in the US are eager to pressure SWIFT to stop dealing with Iran.

Putin’s Position

Russian President Vladimir Putin has stoked fears that the US dollar would be weakened if it went too hard against Iran.

“We are seeing what is happening with the sanctions that are essentially illegal restrictions,” Putin said during a July diplomatic summit in South Africa. “I believe this is a big strategic mistake on their behalf because they are undermining confidence in the dollar as a reserve currency. This is the bottom line.”

The US Treasury Department warned in May that such sanctions would be imposed, meaning that a failure to put pressure on SWIFT would amount to a climb-down from their most intimidating posture.

The question of whether Trump will force SWIFT to target Iran could become a proxy for the debate over whether he’ll flinch if Europe defies the Iran sanctions, according to the sanctions hawks.

“If the Americans back down on pressuring SWIFT to disconnect Iranian banks because it's too hard, it's too dangerous, too risky, they don't want to threaten things of that magnitude, then the Europeans will say,” the Iran sanctions expert predicted, “‘If Trump won't dare to threaten sanctions against board members of SWIFT, why would they ever threaten sanctions against a central bank of Europe of China or of Russia?’